There was, probably, a moment in your life when you saw that amazing product announcement but the price was too high, so you said to yourself “ok, I will wait for a few months for the price to drop and then buy it”. On the other hand, if you are a tech enthusiast, you probably bought something on the launch day or even preordered it, not caring about the price. You simply liked the idea of being among the first who put their hand on this cutting-edge technology. In both cases, you witnessed price skimming. Trust us, that tech company calculated your steps and counted on them in their pricing strategy.
In the following paragraphs, we will define price skimming, explain how it works and when is it appropriate. In the end, we will give you some great examples of successful companies using a price skimming strategy to increase their return on investment (ROI) and sell their products at the best price for them.
So, what is price skimming?
Price skimming is a product pricing strategy by which a company is setting the highest initial price for a product and then lowers it over time. What is meant by price skimming is that the company is “skimming” customer segments by lowering the price over time.
Price skimming is also called skim pricing. This pricing strategy is mostly used by companies that develop new products, so at the launch moment, there is almost no competition and therefore no pricing pressure.
Usually, price skimming is used when a new product enters the market. The company responsible for that product chooses the highest price point customers are willing to pay for that product. This allows the company to gather as much revenue as possible while competition has not entered the market and the demand is high enough. This way company can quickly return its investment in product development.
At this first phase of the price skimming, the company is counting on innovators and early adopters. For example, in the tech industry, those are the people who are always looking for cutting-edge technology and the latest innovations to buy. In the fashion industry, those would be trendsetters always looking to buy fresh new designs for the following season. Those kinds of people are willing to take some risk, and they are price insensitive. This phase is followed by price skimming marketing, labeling the product as a “must-have” and “the best in its category”.
The first phase is considered to be over when the demand is satisfied for the first, highest price. By that time, competitors usually enter the market so it’s the moment for a price drop. This way of dynamic pricing allows the company to keep its competitiveness. When the price is lowered, a second phase of the price skimming strategy started. This follow-on price is appealing for more price-sensitive consumers, who start to buy the product. Theoretically, this would lead to a bigger quantity of sold products and generating additional revenue. Additionally, the lower price would put some additional pressure on the competitors who are trying to enter the market at this point, since they would be using penetration pricing.
The question we hear a lot is “price skimming works best for which types of products?”
There is no unique answer, but it is trou that price skimming works better for some types of products than for others. Products that are connected to the innovations and are launched regularly are the best fit for skimming prices. For example, tech or fashion industries’ companies have great results when doing the product pricing this way.
Usually, a price skimming strategy is appropriate when the demand curve is inelastic. This means that the quantity of demand is not very affected by the price, and lowering it would have only a minor effect on increasing the sales volume. Another condition for price skimming to be successful is that enough customers are willing to pay the high price for the product and that price does not attract competitors too fast.
Also, price skimming is appropriate when the high price is interpreted as a sign of high quality. This is why it can be combined with the psychological pricing strategy called “prestige pricing”. However, you need to be careful there. If you pick too high a price point, or the price reduction comes too late, the customers can turn to a cheaper product. This will limit your sales volume. Additionally, if the new product price is much lower than the original price, you can make your loyal customers angry. Too big difference in two prices will make innovators and early adopters feel ripped off and if your company has already done this a few times, customers will start to wait a couple of months before buying the product.
As we said, price skimming is one of the commonly used strategies in the tech industry. Almost every tech giant is using this tactic at least for pricing some if not all of their products. Great examples from the tech industry are Apple and Samsung – they’ve been using price skimming very successfully to increase their sales and attract customers.
Some other industries’ giants use this pricing strategy as well. For example, Nike is known for setting the high price for its new products and then lowering them at the end of the season.
Samsung is well known for two pricing strategies. The first one would be competitive pricing but right next to it is its price skimming strategy.
Let’s take for example Samsung’s 2020. flagship phone Galaxy S20. On the release day, the price of this smartphone was $999. However, after the release of its new flagship smartphone this year, Galaxy S21, the price of the last year’s phone significantly dropped and it now can be found for the price of around $600 depending on the store you are buying it from.
In the following chart, you can see how the price of Samsung smartphones is changing over time. It is noticeable that the price goes down faster at the beginning, then, the drop starts to slow down.
As we were able to see, price skimming can be a very useful strategy in theory. However, in reality, many factors should be taken into consideration before deciding in favor of this strategy. Your marketing strategy should be in line with your pricing strategy. Also, your product should be good and innovative enough so you can justify the high price. Most importantly, you need to keep an eye on your competitors to avoid situations like setting a too high price or lowering the price too late.
Price2Spy can help you with this, most important step of any pricing strategy – keeping an eye on your competitors. With our price monitoring tool, you will always have updated pricing data you can use to make the right decisions at the right moment. Try it free for 30 days, and see how it works from the first hand!